January 15, 2013
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How long does it take to collect money that is owed to your small business?
The reason I ask is because your company’s cash collection cycle is an essential gauge of profitability. The sooner your small business collects on its receivables, the shorter its cash collection cycle–which should be a primary financial goal.
However, the reality is this: There is a huge discrepancy between what most small business owners expect versus the actuality of when payments are received.
A Typical Cash Collection Cycle
To improve your company’s cash collection cycle, consider the following timeline:
1. Invoicing: After a sale an invoice is created within 1-3 business days depending on the type of business, where it is generated, and by whom.
2. Delivery: Many small businesses send invoices by mail, therefore depending on where a client resides, mail can be delivered immediately or within days. On average, mail is received within 3-5 business days.
3. Invoice Due: Generally speaking, small businesses get paid within 30 days of invoicing. This is a common length of time many businesses extend credit to clients.
4. Payment Receipt: Clients can render payment via several payment methods – over the phone, online bill pay, or through a company website. Many businesses, however, still choose to pay by check via standard mail. This method can take 3-5 business days for a company to receive payment.
Looking at this standard timeline, it can take a small business approximately 34-38 days to receive payment on work that has been completed. Of course these are assumptions and many small businesses can have a much shorter cash collection cycle, but these assumptions are not far from reality. It is not uncommon for businesses to wait to receive payments longer than 30 days.
How to Improve Your Cash Collection Cycle
It is important to manage your cash collection cycle carefully. Small businesses that have a sound and efficient billing process can minimize or eliminate late and non-payments altogether.
Accelerating your cash flow means you have more cash on hand. Having more cash on hand will allow you to operate and grow your business.
Here are four simple ways to improve your cash collection cycle.
1. Ensure the invoice is complete.
Invoices must be easy to understand, detailed, and specific. It should contain all the necessary information that both you and your client can see and understand. Invoices should contain the following items:
a. Your company’s and your client’s contact information
b. The date the invoice was created
c. A description of the service or product
d. The total amount due (include itemized amounts if necessary)
e. The date when the total amount is due
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